The Bull Bear ratio on the SPY remains just above neutral, with price stubbornly below the long term Chaikin trend. Utilities, Healthcare and Staples now with Power Gauge ratios higher than the market, and high beta, cyclical sectors lower. We remain on the sidelines as far as bullish trend trades go until a breakout above the 1882 area on the S&P. We are taking Marc Chaikin's Bearish Stock of the Week as a speculative earnings trade (you get his newsletter as part of your Chaikin Analytics subscription, and that alone can pay for your subscription during earnings season) Free Trial. We are trading an out-of-the-money put calendar on LINKEDiN to make a directioal bet and to profit from the volatility skew that arises around earnings. Here's where we got filled today: BOT +5 CALENDAR LNKD 100 JUN 14/MAY2 14 140 PUT @2.85 CBOE
CME reports earnings May 1. Marc Chaikin has taught me to enter a speculative earnings trade in the direction of the Power Gauge when there is an attractive technical set up. CME is overbought and bounced down of a significant resistance level Friday. If CME stays below 72, we'll keep our Bear Call Spread in place through earnings. Here's the risk defined option trade a I made a couple of days ago: SOLD -6 VERTICAL CME 100 (Weeklys) MAY2 14 71/73 CALL @.55 CBOE It has a 33% chance of being a loser, but a 37% return on risk. We've had a high win rate leveraging Chaikin Analytics and trading option spreads over the past year.
We remain on the sides-lines with no plans to initiate new bullish trend trades until there is an improvement in market conditions
With the market at resistance and below the Chaikin trend-line, our rules restrict our trading to short term directional trades. FSLR has a Very Bullish Power Gauge rating; it's exhibiting strong technicals, money flow and relative strength. While the solar group overall is weak, FSLR is more closely tethered to the semi-conductor space rather to alternative energy sector. Earnings aren't until 05/6, but the stock is making a move out of oversold territory now. Our plan is to exit just prior to earnings. Here's the long option trade we took today: BOT +1 FSLR 100 JUL 14 65 CALL @9.95 NASDAQ.
Very Bearish rated Amazon has earnings after the bell on 4/24. It's trading up near a former support level, which will often act as new resistance. For speculative earnings trades, we favor risk-defined option spreads, especially those that offer the trader an advantage in implied volatility skew. With that, along with the predictive power of Chaikin Analytics Power Gauge, we feel that we really have the wind at our back. The market maker anticipates that the stock will move $22 once earnings are announced. We're making our bet to the downside. Here is the trade: BUY +2 CALENDAR AMZN 100 JUN 14/MAY1 14 320 PUT @4.66 LMT [TO OPEN/TO OPEN]
A big intra-day reversal yesterday and a strong pre-market has the S&P poised to possibly break through a former support level. We're likely to see more choppiness as bulls and bears duke it out. With the Power Gauge ratio remaining under 1 and the technicals all flashing red, we're remaining on the sidelines as far as initiating new trend trades.
Earnings season presents a plethora of speculative earnings trading ideas. One we like is ATHN. With it's Very Bearish Power Gauge rating and very bearish financial metrics, the stock could have more downside when it announces earnings. We like using options because of the ability to control risk and take advantage of implied volatility skew which favors selling the front month (expensive) options and buying the back month (cheap) options in a calendar trade. AA is putting on a Double calendar to protect against an upside surprise. I'm going with a directional calendar and making a downside bet. Here is my trade. BUY +6 CALENDAR ATHN 100 (Weeklys) MAY1 14/APR4 14 137 PUT @.71 LMT [TO OPEN/TO OPEN]
With the S&P trading below both its short and long term Chaikin trendlines, we have moved to the sidelines on bullish trend trades. The market could find a short term term bottom and bounce, but with significant technical levels breached, we are cautious about buying into it. We'll wait for price to get above above a the Chaikin Trendline and the Bull:Bear ratio to move back over 1. You can view the Bull-Bear ratio trend here. We may make some speculative earnings option trades in either direction this week.
Stocks worldwide continue to show weakness, with Germany and Australia showing some positive relative strength vs. the US markets.
Commodities, particularly geo-politically sensitive oil and gold and agricultural products are showing relative strength vs. equities. US Treasury Bonds appear to be the best bullish macro trade, and the TLT's typically inverse correlation to stocks is holding true during this pullback. See the full macro list, ranked by relative strength, here. It's unusual to see dollar weakness and euro strength during a world wide equity pullback, yet we see that here. Perhaps this is driven by the Fed Minutes which imply the Open Market Committee will keep rates low for an extended period after Q/E is put to bed. This may be trumping the flight to safety which usually boosts the dollar as bulls liquidate long equity positions.
The Chaikin Analytics Bull:Bear Ratio fell to its lowest point of the year yesterday (track the ratio for every trading day of the year here and the S&P broke below a key technical level yesterday. Our intermediate term market posture has moved from Neutral to Bearish. Today we're taking advantage of some sell signals in the weakest performing market sector, like Consumer Discretionary. TIF has a Very Bearish rating, is in a weak industry group and underwent a technical break down yesterday. We're fighting the market maker to get a goof fill on an out of the money call spread. We are also short Pandora and Rubbermaid.
Hopefully by trading your own account, watching us trade or analyzing the back-testing results available from the Chaikin Power Tools website, you've come to appreciate what a powerful stock picking edge traders gain using Chaikin Analytics. The Power Gauge is a simple, reliable way of knowing how equities are likely to fare against the broader market over a 3 to 6 month time horizon, with Very Bullish rated individual stock portfolios routinely out-performing market indexes significantly.
But selecting investments with strong relative performance potential is only part of what it takes to be consistently successful. In fact, I've found that more consistent personal profits have come with an improved understanding of market conditions and by then matching trading strategies to market environment, sometimes BEFORE it shows up in the price action.
Chaikin Analytics' Power Gauge helps predict relative stock price movement before it occurs because it rooted heavily in the same financial metrics and fundamental factors that prompt Big Money trading desks to value and then accumulate what's cheap or distribute what's expensive. That's why my trading partner AA and I place so much emphasis on The Power Gauge and have created and track aggregate Bull:Bear power gauge ratios (the relationships between between bullish and bearish stocks) within markets, sectors and industry groups. It's the key to our trading life.
By comparing these ratios to each other and the market, we believe we have a roadmap of future relative strength, one that gives us an edge over traders who simply trade relative strength strategies on past performance alone. It's working for us.
For the past year and a half, market conditions have been favorable for longer term trend following strategies, and Chaikin Analytics has provided us with a steady stream of "Classic Bulls" - Stocks with Very Bullish ratings, strong technical ratings, rising Chaikin trend-lines and strong industry group ratings. We have restricted our bullish trade entries to sectors which have Bull:Bear ratios superior to the S&P. We've just waited for the appropriate buying signal, pulled the trigger and simply managed stop loss protection as each stock made a series of higher highs and higher lows. We cut our losses quickly when we were wrong. While the market delivered 30% returns, our portfolio generated better than 45% ROI annualized.
The old saying goes: "Everyone's a Genius in a Bull Market." Thanks to Chaikin Analytics, we've simply been geniuser.
But the Power Gauge is a reliable predictor of future relative performance, not absolute performance. Fine when the market is screaming up. When the market is screaming down, initiating trend following strategies likely to deliver "less worse" performance than the market is something we'd rather avoid.
There is a way to use Chaikin Analytics to help us formulate rules for different market conditions, then trade appropriately whether the likely direction is up, down or sideways. Better still, Chaikin Analytics has the data we need to help us figure out likely future market conditions.
AA and I have been writing for the past few weeks about how the market has taken on a more defensive posture even while it's been hitting new highs. While the S&P has been range bound on the surface, a lot of churning has taken place underneath. Some of this is simple sector rotation. In the graphic above, look at how the Bull-Bear ratio for the beaten down energy (XLE) sector has spiked in the past few weeks. Now is a great time to be looking for great industry groups and stocks in that sector. It's why we bought oil refiner VLO last week.
But, we set a price target and an exit date, because our rules no longer allow us to take open ended trend trades until market conditions are more favorable.
Other market trends are more concerning. The consumer is 70% of the US economy and both consumer centric ETF's (XLY and XLP) have bearish Power Gauge ratios and have been lagging the S&P for months. The bull bear ratios of cyclical sectors like Industrials, Basic Materials have waned (though they have certainly not fallen off a cliff), while a more traditionally defensive sector Utilities (XLU) is flashing green. Look at the bull:bear ratio trend above over the past 3 weeks! Price action has started to follow.
Divergences are a powerful early warning system. While the market itself hit a new high this week before reversing rather violently Friday, we note the SPY bull bear ratio made its high for the year on March 10th. And the ratio hasn't been above 3 since November. There are still a healthy 119 stocks with a bullish or very bullish Power Gauge rating in the S&P 500 index, and the bull bear ratio remains solidly above 1. We are watching for a divergence on the SPY, QQQ and IWM Overbought/Oversold oscillators. If any roll over before making it into overbought territory, while the ETFs make another high, that will be a VERY bearish development.
The price action on QQQ, the ETF which tracks that Nasdaq's biggest names has diverged so much from the S&P that Chaikin Analytics fired a relative strength breakdown sell signal over the weekend. The same holds true in the Russell 2000 small cap index ETF, IWM. The major indexes never diverge from one another for long. The Russell and the Q's were the leaders on the way up, and it's quite possible they'll lead a downward correction. Only time will tell.
Are we selling everything? Are we net short? No. We're in a bull market and the trend of higher highs and lows remains in tact in most sectors. However there are plenty of signs that the market could enter a corrective phase soon, so here's our game plan
While we put no new trades on today, we did notice one thing. Mr. Market has once again returned to test record highs. We did see a new intraday high on the S&P earlier in the week, however a new closing high has yet to be recorded. Although, we believe it’s coming. Our target on the S&P is in the 1900 ballpark. If you look at our Sector Analysis, you’ll see four sectors are outperforming the broader market. They are XLU (Utilities), XLV ( Health Care), XLF (Financials) and XLE (Energy) has made quite a move and now outperforming the S&P using the Bull-v-Bear ratio.
While we are bullish on the market, it is worth noting that the XLY (Consumer Discretionary) continues to show weakness, which is troubling.
Our posture remains Bullish overall. We continue to trend trade stocks with a “Very Bullish” Power gauge Rating, in sectors outperforming the S&P.
If you have yet to grab your free trial of Chaikin Analytics, it’s not too late. Get it here: Free Trail
Write something about yourself. No need to be fancy, just an overview.